Hanmi Financial Corp (HAFC) 2004 Q1 法說會逐字稿

Good afternoon. And welcome to the Hanmi Financial Corporation's First Quarter 2004 Earnings Call. After the remarks by the management, the call will be open to questions.

You may put yourself in queue, by pressing star, 1 on your touch-tone phone. If your question has already been answered, you may remove yourself from the queue by pressing star, 2.

This call may contain forward-looking statements, which are made under the SEC's Safe Harbor Rules for forward-looking statements.

Forward-looking statements relate to the company's future operations, prospects and businesses and are identified by words such as may, will, should, could, expects, plans, intends anticipates, believes, estimates, predicts, potential or continue or the negative of such terms.

Although we believe that the expectations reflected in the forward-looking statements are reasonable based upon our current judgment, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements.

Such statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Hanmi Financial.

Accordingly actual results may differ materially from those expressed in or implied or projected by the forward-looking information and statement. Hanmi undertakes no obligation to update any forward-looking statements in the future.

For additional information on factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements, please see the company's filings with the SEC. I will now turn the call over to Mr. J. W. Yoo, Hanmi's President and Chief Executive Officer.

Please go ahead, sir.

Thank you. Good afternoon, everyone. And thank you for joining us today. With me is Michael Winiarski, our Chief Financial Officer.

I will begin with a few remarks regarding our activities during the quarter, followed by Michael, who will discuss our first quarter financial results. We're then happy to consider whatever questions you may have.

I am pleased to note that for the first quarter ended March 31, 2004, financial performance was the best in Hanmi's 21-year history.

Net earnings were a record $6,400,000, an increase of 51 percent over net earnings of $4,200,000 in the first quarter of 2003. Fully allotted for the quarter net earnings per share was 45 cents compared to 30 cents a year ago.

Michael will explain in some detail those aspects of our operations that contributed to this record performance.

Our acquisition of the Pacific Union Bank continues to go smoothly. We received the approval of the Federal Reserve on April 12th, less than four months after we announced the definitive agreement. And the merger is on track, to close on schedule by the end of this month. This is by far the single biggest event in Hanmi's history. Overnight it nearly doubles the size of the bank.

With assets over $3,000,000,000, we will become the undisputed leader among all Korean-American community banks in the country. And with the economies of scale and the pooling of the resources that will come with the merger, we will be well positioned to better serve both our customers and our shareholders, all of whom are essential to our continued success.

The merger will also extend the Hanmi's reach into Northern California and to facilitate our program to expand our business into other ethnic communities.

We expect that the full integration of the Pacific Union Bank, which shares with Hanmi, a strong corporate culture and dedication to relationship banking, will be completed not later than the end of 2004. This early January, we and our counterparts at Pacific Union Bank, we believe is now of the size and structure to thrive in such an environment.

OK, as I told you during the last conference call, the merger will be slightly diluted to earnings in 2004. But it is expected to reduce costs of merged entities by more than $10,000,000 on an annualized basis, with the corresponding improvement in operating margins in 2005, and beyond.

Like virtually every other industry, banking is an increasingly competitive business. Hanmi Bank, we believe is now of the size and the structure to thrive in such an environment. With the merger all but completed, and with the economy getting stronger, we remain extremely positive regarding our - the outlook for the continuing growth in 2004.

With that, I will turn the call over to Mike.

Thank you, JW. As JW mentioned, Hanmi's net income for the quarter was a record $6,400,000 compared to $4,200,000 in the comparable period a year ago. And $5,100,000 in the fourth quarter of 2003.

Pretax earnings for the first quarter were $10,500,000, up 60 percent from the first quarter of 2003. And approximately $600,000 higher than fourth quarter 2003 pretax earnings of $9,900,000.

Net interest income before provisions for loan losses, increased to 16,900,000, up from $16,500,000 in the preceding quarter and 12,100,000 in the first quarter of 2003. The $4,800,000 increase in year-over-year interest income was due primarily to a $272,000,000 increase in interest earnings assets, while the yield increased from 4.99 percent to 5.29 percent.

The re-pricing of certain high-cost deposits led to slight reduction of a $142,000 in interest expense, while average interest bearing liabilities increased 18.9 percent from $972,000,000 to $1,160,000,000, year-over-year. The average cost of interest bearing liabilities decreased to 1.79 percent from 2.19 percent in 2003.

The sequential increase in net interest income is attributable to a combination of an increase in average interest earning assets and a shift in the composition of the deposits portfolio.

The net interest margin was 4.05 percent or six basis points higher than the 3.99 percent reported in the preceding quarter. Increase in net interest margin reflects the shift in the deposits portfolio during the quarter.

Demand deposits and money market accounts combined, increased from 47 percent to 52 percent of deposits, while CDs decreased from 46 percent to 41 percent of the total.

The yield on interest earning assets increased slightly from 5.22 percent to 5.29 percent. And interest-earning assets grew $16,000,000 during the quarter.

The provision for loan losses was $900,000 compared to 1,200,000 a year ago and $1,300,000 in the fourth quarter of 2003.

At $3,900,000, service charges and fee income were unchanged from fourth quarter of 2003, but up approximately $300,000 from 3,600,000 a year ago due primarily to a decrease in gain on sale of securities. Non-interest income at $4,800,000 was $256,000 lower than in the fourth quarter of 2003. And approximately $300,000 lower than in the first quarter of 2003.

Non-interest rate expense in 10,400,000 compared to 8,500,000 million a year ago, and unchanged from the fourth quarter of 2003. The year-over-year increase reflects salaries and other business development expenses.

By growing the net interest margin and holding on interest expenses steady, the company improved it's efficiency ratio to 47.8 percent in the first quarter, from 48.2 percent in the fourth quarter of 2003, and 53.7 percent, a year ago.

Net income for the first quarter of 2004 reflected provision for income taxes, of $4,100,000, that at 39 percent effective tax rate, compared to $2,300,000, at a 35 percent effective tax rate in the first quarter of 2003. Results for the fourth quarter of 2003 included the reversal tax benefits recognized in the first three quarters of 2003, arising from certain transactions, involving a real estate investment trust.

Our investment portfolio continues to be composed largely of mortgage-backed securities and collateralized mortgage obligations. In anticipation of Pacific Union merger and a planned program to de-leverage balance sheet, in order to maintain our capital ratios, and facilitate future loan growth, the size of the investment portfolio of March 31st 2004 was $362,000,000, a decrease of $52,000,000 compared to 415,000,000 at December 31st 2003.

The yield on the investment portfolio increased by 31 basis points for the first quarter, to 3.08 percent, from 3.49 percent in the fourth quarter of 2003, and by 23 basis points compared to the first quarter of 2003. The increase in yields contributed primarily to the sales of certain low yielding securities. In addition, here to date we have raised $60,00,000, through two issues of press-preferred securities, and we anticipate raising an additional $20,000,000 by the end of April.

Total assets at March 31st 2004, were 1,760,000,000 compared to 1,790,000,000 at year-end 2003. Net loans totaled 1,280,000,000, compared to 1,250,000,000, in December 31st 2003. Total non-performing assets, as a percentage of gross loans, were 0.30 percent in March 31st 2004, compared to 0.49 percent at year-end 2003.

Total deposits were 1,480,000,000, compared to 1,450,000,000, at the end of 2003. With that I'll conclude the recap of the first quarter financial highlights, and JW and I will now be happy to answer your questions.

All right, ladies and gentlemen at this time if you wish to ask a question, please press star, followed by 1 on your touch-tone phone. If your question has been answered or you wish to withdraw your question please press star, followed by 2. Questions will be taken in the order received. Please press star, 1 to begin and we will pause as we compile our questions.

And your first question comes from Bret Rabatin with FTN Midwest Research.

Hi guys, good afternoon.

Hi Bret.

Hi.

A couple of questions. First, can you talk of some - can you talk about the loan growth in the quarter, which you slowed, relative to past quarters - wanted to get some thoughts flowing on the growth and the quarter. Was it decontrolled, given the tighter balance sheet, and then secondly from the point of prospects going forward for the next few quarters?

Actually during the first two quarters we continued to increase our loan volume.

OK, I'm just looking at loans this quarter versus the past quarters. This quarter we're up about 30,000,000, versus the past few quarters have been 60 or 70,000,000, in terms of growth, so I was just curious - on a relative basis, you know, your loan portfolio did continue to grow but not quite the levels it has.

That is quite sure. Actually the - a lot of the decision of (INAUDIBLE) was attributing for that. Partly we saw the loan growth during the first two quarters, but we expected that will continue to grow during the rest of this year.

And I think we can see, we're looking at a very strong loan growth in April, so it's just a matter of a particularly slow quarter of the first quarter. We don't expect it to.

OK, then can you comment regarding the margin going forward, given the increase in the securities portfolio yield. Kind of, how you see the margin for the second half of the year, especially with potential Fed tightening.

OK, let me address that margin issues. Net interest in margin is one of my major concerns. Things are too (INAUDIBLE) at the office of this bank. Because one way to level this bank our embeddings (ph) with margins has been all the time kind of declining from 2000.

So I think that this as a time when we have to analyze what is the reason for that decline and what kind of action we have to take. And you know it is very clear to see that there are two reasons. Our post of forms (ph) is not impressive and our low yield and also investment portfolio yield has not been improved.

I know that the major reason was low-income interest of this ration (ph) but one action we did take over the rest of several months was to improve the cost of funds by changing the composition of the participation (ph).

So as you look at the numbers in March, our TDs, which is actual high interest acquiring deposit, reduced quite a lot, compared with December 30th, there was about 46 percent but now it is about 37 percent.

We continue to reduce high interest of varied deposits. Bu at the same time we increase our demand deposit fund into some varied deposit from 32 percent to 36 percent. So that kind of change of composition of deposit size is one of the contributors for that low cost.

But at the same time, when you look at investment portfolio size, the investment portfolio yield improved quite a lot during the first two quarters, compared with the last year. But that also helped lot in the (INAUDIBLE) of that ...

Yes.

...the margins.

Further to that Bret, you asked about restricting loan drills in the first quarter. We did not do that in the first quarter. However, going forward, we will be instituting a program of hurdle rates for loan re-price coming in, and basically my philosophy is that every asset needs to earn it's way on to the balance sheet. So we'll be providing some guidance this quarter to the branch network, about what our expectations are, in terms of interest rate, on the loan re-price that we bring with the (ph) committee. So we expect that that will have some effect on our stats (ph) as well.

OK, I mean, it seems structurally you ought to have some margin expansion from here. Aside from the fact -- you know even the Pacific Union's margin was down a little bit this quarter. It seems like you ought to have some decent margin expansion from here but just wanted to get ...

That's correct.

You know, that's true.

OK. And then, I was curious if you could give an update on what you have in terms of the proforma (ph) changeable capital? What you're currently looking at in terms of that ratio?

Well, I guess the one that we've been focused on, is the total risk based capital to risk adjusted assets (ph). And, if that really is the key ratio, at March 31st, we were right on the cusp of 10 percent.

OK.

And again, we looked at the decision of, do we restrict on growth (ph)? Do we liquidate portions of our investment portfolio? Or do we think about whether we need to make some adjustments to our capital situation? And the latter was the direction that we decided to go - obviously, that's the only (INAUDIBLE).

OK. And then, one last question and then I'll pass it to someone else. Could you just talk briefly about the charge-offs in the quarter and then, sort of, the reserve came down a little bit. So, I was curious to hear a little more - a little more color on the charge-offs and then, sort of, (INAUDIBLE) basis.

You know, actually we charged of a lot of prevalent Dollars. Most of them are related to one credit, which had turned out, some sour (ph), only last year. But, you know, during the first quarter, we shut it off. Approximately, $1,060,000,000 (ph) for one credit. But then, that has to be a reserve for (INAUDIBLE) provision (INAUDIBLE) on our net - the bottom line.

And the other one is a small charge-off. But I like to be more aggressive in charge-off if there is, you know, qualified guidelines for what charge-offs are targeted.

OK, and then just the reserving process, going forward.

Yes, this way .

Well, I just was curious. You're down to 106 in reserves. And I know this specific scheme has one that's little over 120 in terms of loans. But, you know, not to get (INAUDIBLE) methodology but just relative comfort with the reserve as a whole, going forward.

Well, we intend to continue to use the same reserving method, going forward. You know, I think, you know, your point is well taken that we're getting down to a point were you know, if we get down to zero and in our performing loans, does that mean our allowance goes to zero, I don't think so.

So, we tend to maintain some minimum levels of a reserve, going forward. But we really aren't contemplating any changes in the way that we approach the reserving.

OK, thank you very much.

And your next question comes from Steve Didion with Hoefer & Arnett.

Good afternoon, great quarter. Congratulations.

Thank you very much, Steve.

A couple of questions - Mike, can you give a little more detail on the securities restructuring? Just, what you did and what the strategy was for it?

Well, the strategy was to increase return on that (INAUDIBLE) very simply. And, we saw some opportunities to reduce our positions in MBS and in CMOs. So that was the bulk of the reduction - roughly 10,000,000 in MBS and 24,000,000 in the CMO. So, that's where the bulk of the decreases have come and the yields on the remaining securities have improved very nicely as a result of that.

And you must have had a mix of values in there, since there wasn't really any with the - the gain or loss net in the quarter was negligible.

That's right.

OK. It looks likes from the released (INAUDIBLE) loan portfolio growth was all in commercial. There's a slight marginal tip down in real estate loans. Is that mostly coming from the core L.A. Basin (ph) market or can you give us some idea geographically, especially Southern California?

I guess the answer's yes. It's primarily Southern California.

OK.

I have a production report here, in front of me, branch-by-branch and it's fairly dizzying. So, I don't know that ...

There's not one market of Southern California over another that's dominant.

No, really not. It's spread out pretty well, even on the branches.

OK, great, thanks very much.

And once again, ladies and gentleman, that was star, 1 for questions or comments.

And there are no further questions at this time. I will now turn the call back over to Mr. J.W.Yoo.

Thank you very much for joining on the call. We hope you will join again our next call.

Thank you every one.

Ladies and gentleman, thank you very much for your participation in today's Hanmi Financial Corporation First Quarter 2004 Earnings Call. This concludes the presentation. You may now disconnect.